Oct. 11 (Bloomberg) -- Bank of England policy maker David
Miles said the outlook for the economy has worsened and there
are “good reasons” to think that the central bank’s expansion
of stimulus will aid the recovery.

“Since August, the news on the economic outlook has been
overwhelmingly negative,” Miles said in a speech in London late
yesterday. “I believe that there are very good reasons for
thinking that purchases of government bonds in exchange for
money created by the central bank will have an impact on a range
of asset prices and will influence the cost and availability of
credit to the private sector.”

The Bank of England raised the ceiling for bond purchases
to 275 billion pounds ($431 billion) from 200 billion pounds
last week, the biggest expansion since the first round of
stimulus in March 2009. Governor Mervyn King said the expansion
of so-called quantitative easing was a response to what may be
the worst financial crisis ever.

Miles said that the outlook for global growth has worsened
and sentiment in financial markets has “deteriorated
markedly.” He also said recent output surveys suggest U.K.
economic growth may be “broadly flat” in the fourth quarter.

The “deterioration of funding conditions suggests to me
that asset purchases now could support credit and demand
growth,” Miles said. “In conditions of heightened stress in
markets, some banks’ lending may become constrained by their
ability to raise deposits. If QE generates more deposits for
some such banks -- and certainly if it generates longer term
funding -- it could have positive effects.”

Stocks Gain

Stocks rose yesterday after Germany and France set a
deadline for a breakthrough in handling the euro-area crisis.
German Chancellor Angela Merkel and French President Nicolas
Sarkozy put recapitalization of banks at the top of the priority
list in a joint declaration in Berlin on Oct 9. Sarkozy said
they would deliver a plan by the Nov. 3 Group of 20 meeting.
Europe’s Stoxx 600 rose 1.7 percent, while in the U.S., the S&P
500 jumped 3.4 percent.

In a question-and-answer session after his speech, Miles
said that while the Bank of England could only continue to
monitor conditions external to the U.K. economy, it wasn’t
powerless.

“We will be affected by conditions in the wider world and
Europe in particular,” he said. “I don’t think we’re
powerless.”

QE Influence

Miles said QE can influence the economy via two channels,
first through the “impacts on a range of asset prices of the
portfolio rebalancing in the non-bank private sector that
central bank purchases generate” and second by “potentially”
alleviating bank-funding constraints if they exist.

He also said banks must reduce leverage and become “much
more robust” to prevent a repeat of the financial crisis.

“But for today monetary policy should be set to help
prevent the economy from stagnating and driving inflation to sit
persistently beneath the target,” Miles said. “That is why
today the bank has started to buy more assets.”

While the bank is targeting gilts in its purchases, that
should have “very desirable knock-on impacts” on other assets,
including increasing the demand for corporate bonds, Miles said
in a television interview broadcast on CNBC’s website today.

“The yields on corporate bonds have actually moved up
quite significantly over the past couple of months,” he told
CNBC. “We can have quite a substantial affect on bringing down
the cost of that corporate debt.”